Hi there, Stan, The Annuity Man, Americans annuity agent, licensed in all 50 states. Scratch, scratch, itch, itch. My head is scratchy. Ive got a full head of hair, by the way. Okay. Todays topics kind of a weird one, and I might lose my mind over it. The topic is What is an Annuity Loan? L-O-A-N. Im going to take a deep breath. Im going to take a sip of Coca-Cola, the sugar-free kind, because I cant do the sugar, and then Im going to tell you about my thoughts on annuity loans.
All right, here we go. Im getting these calls occasionally about annuity loans. Can I get a loan off this annuity, Stan? Heres my opinion on that. Unless its just an emergency, unless something had changed from when you purchased the annuity type to when youre asking me that question, should you get a loan on the annuity? Never, ever, ever, ever buy an annuity with the premise in mind in the future, youre going to take a loan off of it. Just dont do that. Not all carriers will. Truly, Ive been doing this for decades. And I have thousands of clients and sell more annuities than anybody on the planet. I am Stan The Annuity Man, Americas annuity agent. Not one client that I know of has taken a loan off of their annuity. Because to me, thats not suitable or appropriate.
Now, in the world that I live in, which is the world of facts, truth, and simplicity, thats not normal in the annuity and life insurance sales world because every agent out there seems to make everything very complex. This sales pitch is so horrific it makes me want to vomit. Theyll say, “Well, with this life insurance policy, you can get tax-free income. Be like the Rockefellers and get tax-free income off a life insurance policy.” Theres no tax-free income. Its called a loan. When you take a loan off a life insurance policy, there are fees for the loan. People say, “Well, this guy said, and this internet page said, and this website page said I could take, its tax-free income.” Its a loan. When you put money in the bank and you take money out of the bank, is that tax-free income? No, its not. Youre just taking your own money. When you get a loan from the bank, is that tax-free income? Nah, youre getting a loan.
The bottom line, whether its life insurance or annuities, loans should not be attached to any of that. Period. Now, I know there are extenuating circumstances, emergencies, and all that stuff, and you see the ads on TV where people give you pennies on the dollar for your annuity or life insurance policy, whatever. Those are secondary market type things. But this question we had to talk about is annuity loans. Im not even going to go into the specifics of how that might even work because if youre my client, Im going to say, “What are you doing? What are you talking about? Why would you ever do that? You got to give me a really, really, really, really good reason.” And if anyones trying to sell you a life insurance product, then say tax-free income, no, no, no. Thats a loan. Thats a loan off of the policy. Period. End of story. You cant polish it up more than that.
I know that the Internets rife with all these sales pitches. Give me a break. That sales pitch has been around for over 30 years. They just keep putting lipstick on the pig, as they say. When you buy an annuity, especially through us at The Annuity Man, you can go to our site, run your quotes on our proprietary calculators, get books for free, watch the videos and the podcasts and all that stuff. Were going to make sure youre putting money in whatever annuity type is appropriate and suitable and is not overfunded.
Taking out a loan against your annuity can provide access to funds during challenging financial times. However, annuity loans are not for everyone and come with risks. This comprehensive guide will walk you through the annuity loan application process in 7 easy steps.
What is An Annuity Loan?
An annuity loan allows you to borrow against the cash value of your annuity contract It works similarly to taking out a loan against a 401k or life insurance policy
With an annuity loan, the insurance company you have the annuity with provides the loan using the cash value in the annuity as collateral This allows access to funds without surrendering the annuity and paying taxes and penalties
Annuity loans typically have favorable interest rates since the annuity cash value secures the loan However, if the loan remains unpaid, the annuity risks lapsing
Step 1: Determine if Your Annuity Allows Loans
Before applying, verify that your annuity contract allows loans. Most deferred annuities permit loans, but immediate annuities and certain income annuities may not.
Carefully review your annuity contract or contact your annuity company to confirm loan eligibility. Determine any limitations, such as a minimum or maximum loan amount.
Knowing the total cash value and accumulated interest in your annuity is key to determining the loan amount you qualify for. Annuity companies typically only lend up to 90% of the contract value.
Step 2: Review The Loan Terms
If eligible, take time to understand the loan terms to avoid surprises. Key factors to review include:
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Interest Rate: The interest rate on an annuity loan is usually around 1-3%. Since the annuity secures the loan, rates are typically low.
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Interest Payment: You’ll owe interest monthly or annually on the loan balance. Unpaid interest gets subtracted from cash value.
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Payback Terms: Annuity contracts usually give 5-10 years to repay the loan principal and interest.
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Surrender Charges: Taking a loan does not typically trigger surrender charges but read the fine print.
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Tax Implications: Annuity loans don’t generate taxable income. However, if the annuity lapses due to nonpayment, taxes and penalties can apply.
Having a clear picture of the costs makes it easier to budget for repayment. Consult a financial advisor if any terms seem unclear or unfavorable.
Step 3: Submit the Loan Application
Once satisfied with the loan terms, complete the annuity company’s loan application form. Most insurers have a standard application to request an annuity loan.
The loan request details the amount you want to borrow and repayment terms. Typical information required includes:
- Annuity account number
- Loan amount requested
- Bank account details for depositing the loan
- Repayment frequency (monthly, annually)
- Repayment term length (5 years, 10 years, loan duration)
Submit any other documents the annuity company requires, such as a signed loan agreement. Some may also request evidence of ability to repay. Applications may take 1-2 weeks for approval.
Step 4: Receive Your Loan Approval
The annuity company will review your loan application and issue an approval letter if satisfied you qualify. This letter outlines the loan terms for your review.
Details include the exact loan amount, interest rate, repayment schedule, and consequences for nonpayment. Read this carefully before proceeding to ensure you agree with the terms.
At this stage, some annuity companies may require additional paperwork, such as a signed loan disclaimer acknowledging the risks. Make sure to submit any other requested documentation promptly.
Step 5: Sign the Approval Letter
Once the loan approval letter arrives, sign it if you want to move forward. This executes the loan agreement and authorizes the annuity company to deposit the funds into your bank account.
Retain a copy of the signed letter for your records in case any questions arise. You should receive the loan funds within 10-14 days after signing.
Step 6: Avoid Early Withdrawal Penalties
A key benefit of an annuity loan versus full withdrawal is avoiding taxes and penalties. However, certain actions can still lead to fees:
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Nonpayment: Unpaid loan interest gets withdrawn from the annuity cash value. If the full balance gets withdrawn, taxes and penalties apply.
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Early Annuity Surrender: Cashing out the annuity before age 59 1/2 also incurs a 10% penalty aside from income taxes.
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Annuity Lapse: If the loan causes your annuity to lapse, the IRS treats this as an early withdrawal with applicable fees.
Make on-time repayments and avoid excess withdrawals to prevent these costly consequences. Consider the risks before taking out an annuity loan.
Step 7: Avoid Default by Repaying On Time
To keep the loan in good standing, repay the principal and interest charges on schedule. Exact terms depend on your agreement but monthly or annual payments are typical.
Automatic payments from your bank account help avoid missed payments and late fees. Partial repayments may be possible but discuss options with the annuity company first.
If unable to make payments due to financial hardship, contact the annuity company immediately to review alternatives. Delayed or skipped payments put your annuity at risk of terminating.
With proper planning and budgeting, an annuity loan provides affordable access to funds locked in your annuity. Just make sure to weigh the benefits and risks carefully beforehand. Monitoring repayment closely prevents unwanted fees or taxes down the road.
Don’t Misuse the Product
The annuity industry suggests that you should not put more than 50% of your investible assets. Im not talking about houses, cars, or guitars. Im talking about IRAs, non-IRAs, 401(k)s, savings accounts, and all that stuff in annuities. So, 50%. Can we push it a little bit more and look for a few more percentage points? If you tell me the reason why and I go to the carrier and say yes. Yeah, I can push that. But if you just put in your mind 50% in annuities of all types, Single Premium Immediate Annuities, Deferred Income Annuities, Qualified Longevity Annuity Contracts, Index Annuities, Variable Annuities, whatever, the annuity type is, 50% total. Youre not going to want to take loans off of that policy. Period. And some policies might allow you to take a loan off it, and some might not. Im not even going to go down that rabbit hole because what I want you to take away from this is, please do not earmark annuities of any type for a loan. Please. Thats misusing the product. It wasnt set up for that. All types were not set up for that.
You are fitting a square peg into a round hole. If there ever was an example, its that. Its this annuity loan combination of words that should never exist. But as The Annuity Man, Stan, The Annuity Man, Americas annuity agent, I have to talk about it because people are looking for that answer.
All that tells me is that annuities might have been inappropriately sold, and you might have put too much money in that annuity. And how did that agent get away with it? I dont know, but maybe they doctored the net worth a little bit to make it go through the suitability. Im not going to accuse anybody, but the annuity industry is trying to make sure that that kind of nefarious sales practices out there of taking the little old lady in the trailer in Palatka, Florida, and putting all of her money in an annuity. They do not want that to happen. They do not want you to come to this and say, “I need to take a loan off that policy.” Which means you put too much money into that policy. And thats really what it comes down to. The suitability, appropriateness, and proportion of the money that has been put into the annuity. If that has been done correctly, there is no conversation about loans.
Now, with that all being said and the fact that my heads about to pop off because annuity and loan are used in the same sentence, schedule a call if you want to discuss it with us. We will help as best as possible and try to find the solution that fits you, but an annuity should be the last place on earth you should be looking to take a loan from.
Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.Share this article:
What Is an Annuity Loan?
How do I get a loan for my annuity?
Request a loan application for your annuity from the administrator and fill it out completely. As you are borrowing your own money, creditworthiness is not a factor. The loan application details the amount you wish to borrow. Submit the application to the annuity administrator and wait to be approved.
Can I get a loan from my annuity?
Once your annuity is set up, it will continue to grow for years or decades until you convert it to a retirement income. During that time, you can request a loan from your annuity’s accumulated cash value. The money is yours, so the process is simple.
Can you borrow from an annuity?
It is possible to borrow from an annuity, although this option may not be available for all types of annuities and may come with certain conditions and limitations. Some annuities allow for loans against the account value, but taking a loan from an annuity can impact the growth of the investment and the future income it provides.
How do you get an annuity?
You get an annuity when you make a lump-sum payment to an insurance company in return for a guaranteed cash flow provided through installments from the company. Essentially, you’re making a loan to the insurance company. You give them a large amount of money and they pay you back over time in installments with interest.